Mutual Funds

Fund Query: A sector fund is not ideal for goal-based investing

Parvatha Vardhini C | Updated on December 06, 2020 Published on December 05, 2020

I recently invested ₹2 lakh in SBI Healthcare Opportunities Fund for a long term of at least seven years, for wealth creation. Kindly advise me on this choice. I have invested in this fund for the purpose of my son’s education. What is the possible amount I will get after seven years?

Saravanan Panneerselvam

Pharma stocks/funds have been among the biggest gainers in the past year. Their reputation as defensive bets in uncertain market conditions (in the initial part of this year), as well as the onset of the Covid-19 pandemic, boosted the prospects for these stocks.

Pharma funds have gained anywhere between 50 per cent and 75 per cent in the past year, and SBI Healthcare Opportunities has clocked about 58 per cent returns in the same time period. Like most investors, you have also gone with the flavour of the season in choosing a pharma fund for lump-sum investment.

Points to ponder

However, this choice is not appropriate for you in many ways. A basic principle is to not put all your eggs in one basket by choosing only one fund.

For the ₹2 lakh that you are investing, you can easily split it across 3-4 funds.

This diversification becomes even more important in your case because you have chosen a sectoral/thematic fund which has higher concentration risk. While pharma funds have, no doubt, been on a purple patch so far this year, their performance was no great shakes in the four years preceding — 2016-2019.

SBI Healthcare Opportunities lost 14 per cent in 2016 and 9 per cent in 2018, for instance. Its performance in 2017 and 2019 is nothing to write home about.

This means that all the gains you made in one year run the risk of decimating in another if the sector goes out of favour.

This implies that you should understand the sector well so as to time your entry and exit at the right point, to make maximum gains.

Considering that timing is key for these funds, they are not suitable for savings for goals such as child’s education. These schemes can only be part of your satellite portfolio to make hay when the sun shines.

Your core portfolio for saving towards long-term goals can consist of index funds as well as diversified equity/hybrid funds, depending on your risk appetite.

For the same reasons mentioned above, fixing a seven-year time-frame for a sector fund is not right.

Yes, in the last seven years, SBI Healthcare Opportunities has delivered a compounded annual growth (CAGR) of about 15 per cent. But we can never be sure if this will repeat, especially in a sector fund. It is, hence, not possible to make a return assumption and say how much you will get after seven years.

For diversified equity funds, a long-term (at least 10 years) return assumption of about 10-12 per cent CAGR is usually considered realistic.

Action plan

You can pull out your investment in SBI Healthcare.

Choose from among a combination of index funds which invest in large-cap stocks, multi-cap funds and aggressive hybrid funds.

If the time period of seven years is extendable, it will give you more comfort to wait longer for better returns, if market are doing particularly badly at a time when you will need the money. Else, you can pull out your investment a bit in advance when the going is good and invest in safer fixed deposits.

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Published on December 05, 2020
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